06 december 2021
Criminals have stolen more than $150bn from taxpayers across Europe by exploiting loopholes in tax systems, a new study has found (Cum-Ex files 2.0). Researchers at the University of Mannheim have identified complex schemes involving the buying and selling of shares, which enabled investors to confuse authorities, manipulate tax laws and fraudulently obtain credits at the taxpayer’s expense.
What methods and schemes are used?
The schemes, known as Cum-Ex trading, involve an investor selling shares to a third party on the same date as a dividend is being paid. This creates a legal grey area as to who the rightful recipient of the dividend is, and enables both parties to claim a tax credit on the same dividend (IBA).
It’s thought that investors have been abusing this loophole for decades, effectively reclaiming tax twice on a dividend where the tax itself has been paid only once. The resulting tax losses are estimated to run to billions of pounds (BBC).
These schemes are not new – they originated in London in the early 2000s (BBC) – but they have evolved over the years in response to changes in legislation. One example is the so-called ‘cum-cum’ scheme, applied in instances where tax liabilities are different for domestic and foreign investors (BBC).
Under this modified scheme, a foreign investor, who is ineligible for a tax credit on dividends received, sells shares to a second investor who resides in the country where the company is listed. The second investor claims a tax credit on the dividend, and passes the shares back to the original owner. The tax benefits are then shared by both parties. Using this method, scammers have been able to exploit foreign taxpayers without ever setting foot outside of their own country.
The greatest tax heist of all time?
Experts believe that these scams have been run in numerous European countries over the last 20 years. Now, a large-scale investigation is under way in hopes of determining the true extent of the scams, with more than 1,000 parties under scrutiny, including several British banks (BBC). Authorities in Germany and Denmark are already pointing the finger at firms operating out of London’s financial centre (Ashurst).
The outcome of these investigations remains uncertain, given the legal grey area that the defendants will surely be looking to exploit. Christoph Spengel, a professor of taxation and head of the research team at the University of Mannheim, commented ‘It's not against the law…but in individual cases, in Germany it is against the law if the sole purpose of buying and repurchasing shares is to have a tax benefit.’ (BBC).
Like its European counterparts, HMRC will be monitoring the situation closely with the aim of bringing those who abused the UK tax system to justice. Claims against the directors of UK companies will no doubt skyrocket as the extent of the fraud becomes clear, and insolvency practitioners are poised to use all of their available powers to recover misappropriated funds.
RSM UK’s special investigations team is uniquely positioned to tackle instances of fraud, having accumulated the specialist skills required to identify, trace, and realise stolen funds for the benefit of creditors. For more information on bringing claims against those responsible for fraud, please contact Mark Wilson.